Organic growth beats more failed deals

BHP Billiton
is expected to emphasise its organic growth options at its annual meeting in Perth today after formally abandoning its $US40 billion bid for Potash Corporation of Saskatchewan and resuming a $US4.2 billion buyback.

BHP, which revealed the failed Potash­Corp bid had incurred transaction costs of $US350 million, has outlined plans to spend $US15 billion on growth projects this year but has not provided details on which new projects are the most likely to be approved by the end of June.

“We have an unparalleled portfolio of tier-one assets, which we believe can sustain decades of increased production," chief executive
Marius Kloppers
said after the PotashCorp bid was dropped yesterday due to BHP’s failure to convince Canada of its merits despite offering several significant undertakings.

Canadian Industry Minister Tony Clement said BHP’s bid had not been approved because it had no potash mining experience, it was unlikely to generate new potash sales and it was concerned it could abandon plans for its $C12 billion ($11.95 billion) Jansen project. With BHP expected to be debt-free by the end of this year, the market is struggling to see how it can avoid returning even more cash to shareholders, barring a major deal.

Since Mr Kloppers took over as CEO in 2007, BHP has spent $US875 million on abandoned deals, including the failed takeover of Rio Tinto. and an attempted merger of the two group’s West Australian iron ore businesses, which was stymied by regulators.

Citigroup analyst Clarke Wilkins expects BHP to report earnings before interest, tax, depreciation and amortisation of about $US40 billion each year in the next few years. That would let the miner spend $US15 billion on growth projects, $US5 billion to $US10 billion on buybacks, $US5 billion to $US10 billion on smaller-scale acquisitions and still maintain a very conservative balance sheet. BHP has not bought back any of its shares since it halted a $US13 billion program shortly after it made public plans to bid for Rio Tinto in 2007. There was $US4.2 billion remaining on that ­program, which was reactivated ­yesterday, as foreshadowed in the Weekend AFR.

UBS estimates it will boost earnings per share by about 1 per cent this year. Major shareholders, including BHP’s largest, London-based BlackRock, had recently been pushing for the miner to return some excess cash.

Pengana Capital fund manager Rhett Kessler said: “When it costs you $30 a tonne to get iron ore from the mine to the port and you’re selling it for $150, that’s a very, very rapid cash generator. I think returning cash now is a very good idea."

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BHP’s board is expected to review in February whether it will launch another buyback with the release of its half-year results. However, it could also be keeping its powder dry for another major acquisition.

BHP is likely to face less regulatory scrutiny in a petroleum bid than in metals. There is speculation BHP will look at oil companies and assets in the Gulf of Mexico, and Woodside Petroleum could also be on the radar after Royal Dutch Shell last week sold a portion of its stake.